New ‘look-through’ powers set out in white paper would help regulator ‘follow the money’

“Looking through the corporate veil”

 

The introduction of a look-through power, as set out in the government’s policy document, would enable the regulator to expand its view to look at entities that are not directly regulated, to understand the impact on RPs.

 

The paper states: “The power would, for example, enable the regulator to investigate potential fraud by examining the financial accounts of organisations thought to be financially benefiting from a registered provider.”

 

It adds: “We will consider further the checks and safeguards needed so that there is no misuse of the power on organisations or individuals that are not part of the regulated sector.”

 

Jonathan Walters, deputy chief executive of the RSH, told Social Housing that the powers would assist the body in tracing the “strings being pulled” beyond the registered entity itself, where third parties are involved.

 

“Increasingly over the past five or 10 years, we’re seeing more housing associations, typically new entrants, where the housing association sits as part of a wider structure, either formally and they’re a subsidiary of a group structure, or where they may not be formally or constitutionally linked or owned by somebody else but there’s another power behind them that seems to be pulling the strings, as it were.

 

“And often we are worried that there are things that are going on elsewhere that are driving that, and that funds going into the RP are then disappearing out in ways that aren’t really to do with the registered provider but are to do with a third party.”

 

He added: “We’ve already got something in our standards [that states that] providers shouldn’t exist to further the interests of third parties. But sometimes we want to be able to ‘follow the money’ in terms of what’s happening, and that power to ‘look through’ the corporate veil as it were is a power that we are quite keen on to enable us to trace where we think the strings are being pulled elsewhere.”

 

This could enable the regulator to request information and financial documents from a third party to assist its regulation of the RP, but would not see it start regulating entities beyond its current remit.

 

“This doesn’t give us proxy rights to begin to regulate all sorts of other connected parties to RPs, and clearly getting the legislation right on this will be quite tricky; look-through powers aren’t easy,” Mr Walters said.

 

“But I think what we’d like to do is to try and work out how those funds going into that organisation are being used, how that deal is being structured. And being able to request information and documentation from the third party, and them being able to disclose that information to us, will be incredibly helpful – particularly in situations where we have a suspicion that decisions are being made about what the RP does that are not in its own best interest or are being made under duress.”

 

He added: “If the board is making those decisions because of the financial control that a third party has over them, being able to understand that dynamic and then respond as a regulator is really quite important.”

 

Tightening the definition of non-profit providers

 

The white paper notes that the regulator has adapted its approach to keep ahead of significant changes to the sector in recent years, including around lease-based models and for-profit providers.

 

It says that there are “clearly opportunities brought by new and increased sources of investment to fund social housing”, and that for-profit providers can bring with them “new ideas and ways of working that could present opportunities for specialisation, operating or financial efficiencies, and improved quality for tenants”.

 

However the report also cites concerns expressed during the government’s ‘call for evidence’ from some respondents that “profit maximisation” could result in a poor service to tenants. Where service to tenants is concerned, it says this will be addressed through the reforms to consumer regulation, and it concludes that significant changes to the economic regulation regime are not necessary “at this time”.

 

Instead the smaller amendments to legislation it proposes will “improve the ability of the Regulator of Social Housing to monitor all housing associations and other private registered providers”.

 

It states that tightening the definition of ‘non-profit’ RPs will ensure landlords are “properly classified and treated – for example, to ensure that the regulator properly designates providers, and that bodies really operating for profit do not attract the more favourable housing benefit status for supported housing”.

 

It will also “require landlords to notify the Regulator of Social Housing when there is a change in control of a housing association”.

 

Mr Walters told Social Housing: “I think there are organisations that do exist basically to further other third parties, and although they may not be generating a profit themselves, whether it’s through lease payments or management charges or directors’ fees or whatever it might be, they are effectively passing on monies to an organisation that is trading for profit.

 

“And to be clear, we don’t have a problem with people making a profit but it’s when they are doing it and claiming not to be, and maybe misleading other parties about their actual intentions and status – that’s the issue.”

 

In this regard, both the look-through power and a tightened definition of a non-profit provider will be important, Mr Walters said: “[At] the moment it’s quite hard for us sometimes. Sometimes we have had people come and say ‘well we’re a not-for-profit’ and we think they are a for-profit, and actually proving that in a way that meets [the definition in] our current legislation is quite difficult. So I think being more easily able to determine whether someone is a for-profit or a not-for-profit will be helpful for us.”

When will the new powers come in, and what will they cost?

 

It is important to note that all of the changes outlined in the white paper that require primary legislation – including powers to support the new consumer regulatory functions to be established by the regulator – will take some time to implement through parliament, and a period of consultation with tenants, landlords and other stakeholders will also be required.

 

Asked by Social Housing when this might be, the Ministry of Housing, Communities and Local Government (MHCLG) echoed the white paper in stating that it will “work to bring forward legislation as soon as parliamentary time allows”.

 

It added that it will “take forward non-legislative measures including the development of a set of tenant satisfaction measures” and “work to ensure tenants are empowered to make and escalate complaints with an MHCLG-led campaign on complaints awareness”.

The white paper outlines that government will ensure the regulator “is resourced and able to recruit the right new staff, including at senior leadership level, that have the right expertise in consumer regulation, customer service and tenant engagement to effectively deliver the new consumer regulation regime”.

 

It emphasises that the resources for the consumer function will be “additional” to its economic regulatory activities to ensure the latter remains robust.

 

A financial figure for what this additional resource looks like is not yet available. The regulator will now need to work alongside the department to flesh out the shape and size the organisation will need to become to deliver its new consumer function.

 

The way the new inspections regime is structured will be key to determining the level of the resources required, Mr Walters said.

 

“There’s an ambition in the document for all large landlords to be inspected every four years, so we’ll need to work out what kind of resources level do we need to deliver that. And we need to think about the [tenant service] KPIs and publishing those and what support we need to do that.”

 

He added: “Clearly we will want to do this in a very efficient, value-for-money way.”